Houston — Recent multiyear strength in CIF Rotterdam Urals differentials has potentially opened up an arbitrage to send competing US medium sour grades like Mars and Southern Green Canyon into Europe, an S&P Global Platts analysis showed Thursday.
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While no fixtures have been reported yet, Platts data showed delivered Mars and Southern Green Canyon would have arrived in Rotterdam at discounts to Urals of $1.44/b and $1.39/b, respectively, so far in July. That's out from discounts of 90 cents/b and $1.13/b in June.
In fact, these spreads have largely been workable on a monthly basis going back to May, amid a steady $2-$3/b Brent/WTI spread.
It is clear both that the global medium heavy sour crude market has tightened and that US sours exports have gained market share in Asia.
But little has been offered about how Russians and/or the Saudis plan to ward off an unwanted influx of medium sour US crude into an increasingly tight European market should coordinated OPEC/non-OPEC output cuts backfire and Urals' strength hold up.
Urals CIF Rotterdam has risen steadily since just prior to the November OPEC meeting, touching Dated Brent minus 65 cents/b this week, a high going back to 2014. The strength has stemmed primarily from tighter loadings out of the Russian export hub of Primorsk.
But some traders have said that fewer Saudi barrels heard available in the market have also lent Urals strength. According to cFlow, Platts' trade-flow software, there has been a marked decline in crude flows between the Persian Gulf region and the ARA region between January and June, and official selling prices for Northwest Europe further suggest the Saudis are trying to dissuade buyers.
Northwest European OSPs for Arab Medium and Arab Heavy jumped 70 cents/b and $1/b, respectively, for August, bringing them to ICE Brent minus $3.40/b and $4.40/b. This is the strongest these prices have been since mid-2013.
That said, Mars and Southern Green Canyon still appear too pricey compared with Saudi Arab Medium or Iran Heavy, suggesting the OPEC producers have less at risk than their Russian counterparts, unless Saudi OSP hikes continue unabated, thus opening themselves up to competition from the US.
IS THE ARBITRAGE VIABLE?
While the arbitrage has not yet been worked, it appears to only be a matter of time, as the US export market presents many advantages.
Hedging economics are supported by the stable $2-$3/b Brent/WTI spread. And while some could consider that level insufficient, it does appear to cover Suezmax shipping costs of around 94 cents/b between Houston and Rotterdam, according to Platts calculations.
Further, the dirty tanker market in the US Gulf Coast is weak, suggesting shipowners could be persuaded to take a below-market rate in order to seek more lucrative follow-on routes in other markets.
Port handling and lightering fees could also eat into the arbitrage, but are unlikely to be the sole inhibitor.
The Texas ports of Houston and Corpus Christi, where Southern Green Canyon loads, can handle Suezmaxes, and in the near future will be able to manage the larger VLCCs.
And while Mars loadings out of St. James, Louisiana, may currently be limited to Aframax-sized vessels, traders have worked these sizes before for light sweet exports.
Perhaps the biggest hurdle to US exports of sour grades is near-record demand from US Gulf Coast refiners, home to more than half of the total operable US refinery capacity.
The Gulf Coast is also home to the world's most sophisticated coking capacity, with units designed specifically to maximize the profitability of medium and heavy sour crudes.
In fact, Mars differentials (against WTI) have increased at a greater rate than Urals (against Dated Brent), both as a result of robust runs and increased exports to South Korea, India and China, as well as a decline in sour imports. Should this continue, US sours could at some point become too expensive to compete.
By comparison, European coking capacity represents just a fraction of US capacity, suggesting there is limited demand for US sours, even if the arbitrage economics work out. Still, refiners with the most sizable coking capacity -- like Repsol in Spain and ExxonMobil in Antwerp -- are likely buyers should these spreads hold up.
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